In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%“.

Lovely.

A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.

As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.

GMO 7-Year Expected Returns

Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.

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The rise in rents and home prices is adding additional pressure to the bottom line of most California families. Home prices have been rising steadily for a few years largely driven by low inventory, little construction thanks to NIMBYism, and foreign money flowing into certain markets. But even areas that don’t have foreign demand are seeing prices jump all the while household incomes are stagnant. Yet that growth has hit a wall in 2016, largely because of financial turmoil. We’ve seen a big jump in the financial markets from 2009. Those big investor bets on real estate are paying off as rents continue to move up. For a place like California where net home ownership has fallen in the last decade, a growing list of new renter households is a good thing so long as you own a rental.

The problem of course is that household incomes are not moving up and more money is being siphoned off into an unproductive asset class, a house. Let us look at the changing dynamics in California households.

More renters

Many people would like to buy but simply cannot because their wages do not justify current prices for glorious crap shacks. In San Francisco even high paid tech workers can’t afford to pay $1.2 millionfor your typical Barbie house in a rundown neighborhood. So with little inventory investors and foreign money shift the price momentum. With the stock market moving up nonstop from 2009 there was plenty of wealth injected back into real estate. The last few months are showing cracks in that foundation.

It is still easy to get a mortgage if you have the income to back it up. You now see the resurrection of no money down mortgages. In the end however the number of renter households is up in a big way in California and home ownership is down:

Source: Census

So what we see is that since 2007 we’ve added more than 680,000 renter households but have lost 161,000 owner occupied households. At the same time the population is increasing. When it comes to raw numbers, people are opting to rent for whatever reason. Also, just because the population increases doesn’t mean people are adding new renter households. You have 2.3 million grown adults living at home with mom and dad enjoying Taco Tuesdays in their old room filled with Nirvana and Dr. Dre posters.

And yes, with little construction and unable to buy, many are renting and rents have jumped up in a big way in 2015:

This has slowed down dramatically in 2016. It is hard to envision this pace going on if a reversal in the economy hits (which it always does as the business cycle does its usual thing).

Home ownership rate in a steep decline

In the LA/OC area home prices are up 37 percent in the last three years:

Of course there are no accompanying income gains. If you look at the stock market, the unemployment rate, and real estate values you would expect the public to be happy this 2016 election year. To the contrary, outlier momentum is massive because people realize the system is rigged and are trying to fight back. Watch the Big Short for a trip down memory lane and you’ll realize nothing has really changed since then. The house humping pundits think they found some new secret here. It is timing like buying Apple or Amazon stock at the right time. What I’ve seen is that many that bought no longer can afford their property in a matter of 3 years! Some shop at the dollar store while the new buyers are either foreign money or dual income DINKs (which will take a big hit to their income once those kids start popping out). $2,000 a month per kid daycare in the Bay Area is common.

If this was such a simple decision then the home ownership rate would be soaring. Yet the home ownership rate is doing this:

In the end a $700,000 crap shack is still a crap shack. That $1.2 million piece of junk in San Francisco is still junk. And you better make sure you can carry that housing nut for 30 years. For tech workers, mobility is key so renting serves more as an option on housing versus renting the place from the bank for 30 years. Make no mistake, in most of the US buying a home makes total sense. In California, the massive drop in the home ownership rate shows a different story. And that story is the middle class is disappearing.

According to the California Association of Realtors, California existing home sales rebounded in December 2015, after new loan disclosure rules delayed closings in November 2015.

U.S. home sales exceeded the 400,000-unit level in December after falling short in November. Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 405,530 units in December, according to information collected by C.A.R.

The statewide sales figure represents what would be the total number of homes sold during 2015 if sales maintained the December pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

For 2015 as a whole, a preliminary figure of 407,060 single-family homes closed escrow in California, up 6.4 percent from a revised 382,720 in 2014.

The December figure was up 9.6 percent from the revised 370,070 level in November and up 10.7 percent compared with home sales in December 2014 of a revised 366,460. The month-to-month increase in sales was the largest since January 2011, and the year-to-year increase was the largest since July 2015.

“As we speculated, sales that were delayed in November because of The Consumer Financial Protection Bureau’s new loan disclosure rules closed in December instead, which led to the greatest monthly sales increase in nearly five years,” said C.A.R. President Ziggy Zicarelli. “Sales increased across the board in all price segments in December, but improvement in the sub-$500,000 market was more pronounced as many homes affected by the new loan disclosures were priced under the conforming loan limit.”

The median price of an existing, single-family detached California home rose 2.6 percent in December to $489,310 from $477,060 in November. December’s median price was 8.0 percent higher than the revised $453,270 recorded in December 2014. The median sales price is the point at which half of homes sold for more and half sold for less; it is influenced by the types of homes selling as well as a general change in values. The year-to-year price gain was the largest since August 2014.

“In line with our forecast, California’s housing market experienced strong sales and price growth throughout last year, with the median price increasing 6.2 percent for the year as a whole to reach $474,420 in 2015,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Looking forward, we expect the foundation for the housing market to remain strong throughout the year, with moderate increases in home sales and prices, but headwinds of tight housing supply and low affordability will remain a challenge.”

While more sales closed in December, the number of active listings continued to drop from both the previous month and year. Active listings at the statewide level dropped 11.7 percent from November and decreased 7.9 percent from December 2014. At the regional level, total active listings continued to decline from the previous year in Southern California, Central Valley, and the San Francisco Bay Area, dropping 9.6 percent, 7.6 percent, and 5.2 percent, respectively.

The sharp increase in sales in December and fewer listings combined to tighten the available supply of homes on the market. C.A.R.’s Unsold Inventory Index fell to 2.8 months in December from 4.2 months in November. The index stood at 3.2 months in December 2014. The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate. A six- to seven-month supply is considered typical in a normal market.

The median number of days it took to sell a single-family home increased in December to 39.5 days, compared with 37.5 days in November and 44.1 days in December 2014.

According to C.A.R.’s newest housing market indicator, which measures the sales-to-list price ratio*, properties are generally selling below the list price, except in the San Francisco Bay Area, where a lack of homes for sale is pushing sales prices higher than original asking prices. The statewide measure suggests that homes sold at a median of 97.9 percent of the list price in December, up from 97.2 percent at the same time last year. The Bay Area is the only region where homes are selling above original list prices due to constrained supply with a ratio of 100.7 percent in December, up from 100 percent a year ago.

The average price per square foot** for an existing, single-family home was $230 in December 2015, up from $222 in December 2014.

San Francisco continued to have the highest price per square foot in December at $749/sq. ft., followed by San Mateo ($715/sq. ft.), and Santa Clara ($568/sq. ft.). The three counties with the lowest price per square foot in December were Siskiyou ($107/sq. ft.), Tulare ($123/sq. ft.), and Merced ($124/sq. ft.).

Mortgage rates inched up in December, with the 30-year, fixed-mortgage interest rate averaging 3.96 percent, up from 3.94 percent in November and up from 3.86 percent in December 2014, according to Freddie Mac. Adjustable-mortgage interest rates also edged up, averaging 2.66 percent in December, up from 2.63 percent in November and up from 2.40 percent in December 2014.

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Planning to buy a fixer-upper, or make improvements to your existing home? The FHA 203k loan may be your perfect home improvement loan.

In combining your construction loan and your mortgage into a single home loan, the 203k loan program limits your loan closing costs and simplifies the home renovation process.

FHA 203k mortgages are available in California in loan amounts of up to $625,500.

About FHA Mortgages

The Federal Housing Administration (FHA) is a federal agency which is more than 80 years old. It was formed as part of the National Housing Act of 1934 with the stated mission of making homes affordable.

Prior to the FHA, home buyers were typically required to make down payments of fifty percent or more; and were required to repay loans in full within five years of closing. The FHA and its loan programs changed all that.

The agency launched a mortgage insurance program through which it would protect the nation’s lenders against “bad loans”.

In order to receive such insurance, lenders were required to confirm that loans met FHA minimum standards which included verifications of employment; credit history reviews; and, satisfactory home appraisals.

These minimum standards came to be known as the FHA mortgage guidelines and, for loans which met guidelines, banks were granted permission to offer loan terms which put home ownership within reach for U.S. buyers.

Today, the FHA loan remains among the most forgiving and favorable of today’s home loan programs.

FHA mortgages require down payments of just 3.5 percent; make concessions for borrowers with low credit scores; and provide access to low mortgage rates.

The FHA has insured more than 34 million mortgages since its inception.

What Is The FHA 203k Construction Loan?

The FHA 203k loan is the agency’s specialized home construction loan.

Available to both buyers and refinancing households, the 203k loan combines the traditional “home improvement” loan with a standard FHA mortgage, allowing mortgage borrowers to borrow their costs of construction.

The FHA 203k Loan Comes In Two Varieties.

The first type of 203k loan is the Streamlined 203k. The Streamlined 203k loan is for less extensive projects and cost are limited to $35,000. The other 203k loan type is the “standard” 203k.

The standard 203k loan is meant for projects requiring structural changes to home including moving walls, replacing plumbing, or anything else which may prohibit you from living in the home while construction is underway.

There are no loan size limits with the standard 203k but there is a $5,000 minimum loan size.

The FHA says there are three ways you can use the program.

1. You can use the FHA 203k loan to purchase a home on a plot of land, then repair it 2. You can use the FHA 203k loan to purchase a home on another plot of land, move it to a new plot of land, then repair it 3. You can use the FHA 203k loan to refinance an existing home, then repair it

All proceeds from the mortgage must be spent on home improvement. You may not use the 203k loan for “cash out” or any other purpose. Furthermore, the 203k mortgage may only be used on single-family homes; or homes of fewer than 4 units.

You may use the FHA 203k to convert a building of more than four units to a home of 4 units or fewer. The program is available for homes which will be owner-occupied only.

203k Loan Eligibility Standards

The 203k loan is an FHA-backed home loan, and follows the eligibility standards of a standard FHA mortgage.

For example, borrowers are expected to document their annual income via federal tax returns and to show a debt-to-income ratio within program limits. Borrowers must also be U.S. citizens or legal residents of the United States.

And, while there is no specific credit score required in order to qualify for the 203k rehab loan, most mortgage lenders will enforce a minimum 580 FICO.

Like all FHA loans, the minimum down payment requirement on a 203k rehab loan is 3.5 percent and FHA 203k homeowners can borrow up to their local FHA loan size limit, which reaches $625,500 in higher-cost areas including Los Angeles, New York City, New York; and, San Francisco.

Furthermore, 203k loans are available as fixed-rate or adjustable-rate loans; and loan sizes may exceed a home’s after-improvement value by as much as 10%. for borrowers with a recent bankruptcy, short sale or foreclosure; and the FHA’s Energy Efficiency Mortgage program.

What Repairs Does The 203k Loan Allow?

The FHA is broad with the types of repairs permitted with a 203k loan. However, depending on the nature of the repairs, borrowers may be required to use the “standard” 203k home loan as compared to the simpler, faster Streamlined 203k.

The FHA lists several repair types which require the standard 203k:

• Relocation of loan-bearing walls • Adding new rooms to a home • Landscaping of a property • Repairing structural damage to a home • Total repairs exceeding $35,000

For most other home improvement projects, borrowers should look to the FHA Streamlined 203k . The FHA Streamlined 203k requires less paperwork as compared to a standard 203k and can be a simpler loan to manage.

A partial list of projects well-suited for the Streamlined 203k program include :

The gated estate in Beverly Hills that has topped the price chart of publicly listed homes for sale nationwide at $195 million since last year has lowered the bar, and its asking price, to $149 million.

Real estate entrepreneur Jeff Greene, who owns properties in Florida, New York and California, put his Palazzo di Amore on the for-sale market in November. A few months later, he also offered it for lease at $475,000 a month.

Greene bought the property in 2007 for $35 million and spent eight years expanding the Mediterranean-style mansion. The main residence has more than 35,000 square feet of living space for a total of about 53,000 square feet, including an entertainment complex he added and a detached guesthouse. There are 12 bedrooms and 23 bathrooms.

A floating-style glass-floor walkway over pools and lined by 70-year-old olive trees leads to the entertainment complex, which can seat up to 250 dinner guests. The 15,000-square-foot complex also has a 50-seat theater, a bowling alley and a disco/ballroom with a revolving floor, a DJ booth and a laser-light system.

The estate label, Beverly Hills Vineyards, produces 400 to 500 cases of wine a year. There’s one wine cellar that can store 3,000 bottles and another that can hold about 10,000 bottles.

A 128-foot reflecting pool and fountain, a waterfall, a swimming pool, a spa, a barbecue area and a tennis court complete the grounds.

WASHINGTON (AP) — Americans bought homes in June at the fastest rate in over eight years, pushing prices to record highs as buyer demand has eclipsed the availability of houses on the market.

The National Association of Realtors said Wednesday that sales of existing homes climbed 3.2 percent last month to a seasonally adjusted annual rate of 5.49 million, the highest rate since February 2007. Sales have jumped 9.6 percent over the past 12 months, while the number of listings has risen just 0.4 percent.

Median home prices climbed 6.5 percent over the past 12 months to $236,400, the highest level reported by the Realtors not adjusted for inflation.

Home-buying has recently surged as more buyers are flooding into the real estate market. Robust hiring over the past 21 months and an economic recovery now in its sixth year have enabled more Americans to set aside money for a down payment. But the rising demand has failed to draw more sellers into the market, causing tight inventories and escalating prices that could cap sales growth.

A mere five months’ supply of homes was on the market in June, compared to 5.5 months a year ago and an average of six months in a healthy market.

Some markets are barely adding any listings. The condominium market in Massachusetts contains just 1.8 months’ supply, according to a Federal Reserve report this month. The majority of real estate agents in the Atlanta Fed region – which ranges from Alabama to Florida- said that inventories were flat or falling over the past year.

Some of the recent sales burst appears to come from the prospect of low mortgage rates beginning to rise as the Federal Reserve considers raising a key interest rate from its near-zero level later this year. That possibility is prompting buyers to finalize sales before higher rates make borrowing costs prohibitively expensive, noted Daren Blomquist, a vice president at RealtyTrac, a housing analytics firm.

The premiums that the Federal Housing Administration charges to insure mortgages are also lower this year, further fueling buying activity, Blomquist said.

It’s also possible that home buyers are checking the market for listings more aggressively, making it possible for them to act fast with offers despite the lack of new inventory.

“Buyers can more quickly be alerted of new listings and also more conveniently access real estate data to help them pre-search a potential purchase before they even step foot in the property,” Blomquist said. “That may mean we don’t need such a large supply of inventory to feed growing sales.”

Properties typically sold last month in 34 days, the shortest time since the Realtors began tracking the figure in May 2011. There were fewer all-cash, individual investor and distressed home sales in the market, as more traditional buyers have returned.

Sales improved in all four geographical regions: Northeast, Midwest, South and West.

Still, the limited supplies could eventually prove to be a drag on sales growth in the coming months.

Ever rising home values are stretching the budgets of first-time buyers and owners looking to upgrade. As homes become less affordable, the current demand will likely taper off.

Home prices have increased nearly four times faster than wages, as average hourly earnings have risen just 2 percent over the past 12 months to $24.95 an hour, according to the Labor Department.

Some buyers are also bristling at the few available options on the market. Tony Smith, a Charlotte, North Carolina real estate broker, said some renters shopping for homes are now choosing instead to re-sign their leases and wait until a better selection of properties comes onto the market.

New construction has yet to satisfy rising demand, as builders are increasingly focused on the growing rental market.

Approved building permits rose increased 7.4 percent to an annual rate of 1.34 million in June, the highest level since July 2007, the Commerce Department said last week. Almost all of the gains came for apartment complexes, while permits for houses last month rose only 0.9 percent.

The share of Americans owning homes has fallen this year to a seasonally adjusted 63.8 percent, the lowest level since 1989.

Real estate had until recently lagged much of the six-year rebound from the recession, hobbled by the wave of foreclosures that came after the burst housing bubble.

But the job market found new traction in early 2014. Employers added 3.1 million jobs last year and are on pace to add 2.5 million jobs this year. As millions more Americans have found work, their new paychecks are increasingly going to housing, both in terms of renting and owning.

Low mortgage rates have also helped, although rates are now starting to climb to levels that could slow buying activity.

Average 30-year fixed rates were 4.09 percent last week, according to the mortgage giant Freddie Mac. The average has risen from a 52-week low of 3.59 percent.

On Thursday, fresh evidence of that trend emerged in a report from CoreLogic. Home sales posted a sizable 18.1% pop in June from a year earlier, while the median price rose 5.7% from June 2014 to $442,000, the real estate data firm said.

The sales increase, the largest in nearly three years, put the number of sales just 9.6% below average, CoreLogic said. A year ago, sales were nearly 24% below average.

Notably, it appears more families are entering the market as the economy improves. Although still elevated in comparison to long-term averages, the share of absentee buyers — mostly investors — slid to 21.1%, the lowest percentage since April 2010, CoreLogic said.

“This is the real recovery,” Christopher Thornberg, founding partner of Beacon Economics, said of a market where increasingly buyers actually want to live in the houses they purchase. “The last was the investor recovery.”

Sustained job growth has given more people the confidence to buy houses, CoreLogic analyst Andrew LePage said. California added a robust 54,200 jobs in May, one of the strongest showings in the last year.

The housing market improvement extends nationally, with sales of previously owned homes up in May to the highest pace in nearly six years, partly because more first-time buyers entered the market, according to data from the National Assn. of Realtors.

One factor driving deals is an expected decision from the Federal Reserve to raise its short-term interest rate later this year, real estate agents say.

Leslie Appleton-Young, chief economist for the California Association of Realtors, cautioned that the market still has too few homes for sale and that prices have risen to a point where many can’t afford a house.

Unless that changes, sales are unlikely to reach levels in line with historical norms, she said.

“I am not saying the housing market isn’t robust,” she said.

“I think housing affordability is a big issue…The biggest problem is losing millennials to places like Denver and Austin and Seattle.”

For now, deals are on the rise and people are paying more.

Sales and prices climbed in all six south land counties: Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura. In Orange County, the median price rose 4.9% from a year earlier to $629,500.